M&A In Software Products Sector


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Out look of M&A in Indian Software products sector

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M&A In Software Products Sector

  1. 1. Software Product sector M&A outlook May 2011 Naufal A. Kukkady
  2. 2. Table of Contents Page Executive Summary 3 Indian Information Technology Industry 4 Software Product Companies in India 5 Software Product Revenue Distribution 6 Software Product Revenue Growth 7 Start-up Ecosystem 8 Software Product Start-up Trends 9 Global Software Market FY2015 10 Technology Priorities 11 Global Technology M&A FY2010 12 US Software Product M&A Q1 2011 13 Software Product Domestic Market Outlook 14 Conclusion 15 2
  3. 3. Executive Summary Indian Information Technology Industry and Software Products  IT industry has grown at 24% CAGR over the last decade initially supported by IT services and now by BPO industry  Software product companies have grown to ~500 FY2010  Most of these companies are small and medium business units with a turnover in the range of $0.4mn to $10mn  Revenue from software products is predicted to grow to $9.5bn in FY2015 Software Product Startups  Software product startups are seeing a boom as a result of the maturing ecosystem  Technology disruption and global demand drive software product focus  US and cloud are key focus areas of the emerging product companies Technology Trends  Global software spends to grow to $537bn in FY2015  Cloud computing emerges as the top technology priority for CIOs in India and US  Technology M&A deals valued at ~$119bn FY2010  Software products emerge as the single largest sector contributing to about 42% of the total value  M&A deals involving SaaS were at a premium in US during Q1 2011  SMB’s, Mobile and Internet penetration provide growth potential in the domestic market Conclusion Increasing interest in cloud based services globally open up many avenues for small players in India Domestic SMB’s demand for solutions provide a huge growth potential Increasing Mobile and Internet penetration provide opportunities for growth and consolidation 3
  4. 4. Indian Information Technology IndustryIndian IT/ITeS industry has grown at a compounded annual growth rate (CAGR) of over 24% in the last decade Revenue 2010Market Size TOTAL 13%FY 2010 36.2 14.7 12.8 9.4 73.1 18% 50%FY 2009 34.1 13.6 12.3 9.4 69.4 20%FY 2008 30.1 11.5 10.5 10.8 62.9 IT services BPO Software products and Eng HardwareFY 2007 22.6 8.7 8.2 8.5 48 Market Overview and TrendsFY 2006 17.8 7.2 5.3 7.1 37.4  Exports accounted for 68% of the revenue in FY 2010  IT services contributed to 50% of the total revenues  BPO is the fastest growing sector over the last 5 years at a 0 20 40 60 80 CAGR of 27.5% ($bn)  Domestic Market has grown at 18.1% CAGR over last 5 years IT services BPO Software products and engg services Hardware  Banking, Financial Services and Insurance (BFSI) vertical continues to be the dominant IT consuming verticalSources: Nasscom 4
  5. 5. Software Product Companies in IndiaNumber of product companies have grown five-fold from 102 in FY1999-00 to 539 in FY2009-10 — notincluding captive R&D centresNumber of Software Product Startups (2000 – 2010) 5% 5% 6% 4% 9% 4% Categorical 2% Distribution of 539 Indian 11% Software Product Businesses (2007) 16% 38% ERM Telecom Content Apps Collaborative Apps Search Engines Banking Business Intelligence Engineering Apps Security Others 127 102 103 Market Overview and Trends  Early-movers in the Indian software product landscape had predominantly focused on the financial and accounting domains  Majority of the small companies are focused primarily on the On Or Before 2000 2007 2009 Total domestic market  Most of these companies are small and medium business units with a turnover in the range of $0.4mn to $ 10mnSources: Nasscom, KPMG, CII, Zinnov 5
  6. 6. Software Product Revenue DistributionTop 10 Indian software product companies account for more than half of the total revenuesConcentration of Top 100 Indian software product Global and Domestic activity of Top 100 Indianrevenues FY2010 software companies FY 2010 3% 10% 32.8% 59.2% 36% 74.8% 51% 67.2% 40.8% 25.2% Top1 Top 2-10 Top 11-50 Top 51-100 Top 1-10 Top 11-50 Top 51-100 Global DomesticSources: CII,PWC 6
  7. 7. Software Product Revenue GrowthIn 2015 the annual revenue aggregate of Indian software product businesses is predicted to be $9.5 billionTotal annual aggregate revenue of all software Annual aggregate revenue of Indian software productproduct companies in India companies($bn) ($bn) 9.5 5.605 3.87 1.84 3.68 1.64 1.42 1.2 2.77 0.98 2.68 0.96 3.895 0.69 0.66 1 1.1 0.46 FY 2009 FY 2010 FY 2015* FY 2008 FY 2009 FY 2010 Domestic Exports Domestic ExportSource : Nasscom , * Nasscom projection as of 2008 7
  8. 8. Start-up EcosystemImprovements across ecosystem factors such as venture capital funding, disruptive technologies, incubationcentres among others have spurred the start-up activity Market Overview and Trends  Venture capital and private equity (PE) firms, which were Venture earlier focusing on the services businesses, have now Capital expressed a growing interest in Indian software product businesses.  Technologies such as virtualisation, Service Oriented Architecture (SOA), innovative delivery models like web- services, SaaS and subscription / on-demand business models have reduced entry barriers  Over 40 incubation centers spread across the country are Growing Maturing Technology keenly focused on assisting technology start-ups with funding Market Ecosystem Disruption and mentorship- over 28 start-up product companies have been incubated*  Software spends globally are forecasted to grow from $294 billion in FY 2008 to $537 billion in 2015 Incubation Centers Sources: Nasscom, PWC, CII;* 2008 data point 8
  9. 9. Software Product Start-up TrendsUS still remains the major geographic focus for emerging companies in India Geographic focus for growth Investment in Cloud Technologies in Future Asia excluding India Maybe 9% 10% 5% US 13% 19% 5% No Europe 11% 31% Australia & NZ Yes 17% India Currently Africa 23% 57% Evaluating Middle East Focus areas to tap the Domestic market Focus areas for Product companies Business Intelligence 19% 16% 16% Collaboration Large Enterprise Mobile&telecom 34% SMB 8% ERM 16% Local R&D Content Magement 32% 8% Security Government Recruitment 18% 8% 16% 8% OthersSources: Nasscom 9
  10. 10. Global Software Market FY2015Software spends globally are forecasted to grow from $294 billion in FY 2008 to $537 billion in 2015* Global software spends FY2015($bn) Export Potential Higher Domestic Potential Higher 59.8 60.4 30.3 33.1 26.2 25 15 17.5 11.2 5.2 BI ERM Security BFSI Telecom Storage Search Engine Mobile Online Gaming Retail Marketing ApplicationsObservations Vertical search and local search trends have led to a rise in the number of search engine companies targeting these niches, both in India and globally Indian SMBs will present significant addressable market potential for business intelligence (BI) and enterprise resource management (ERM) Mobile applications market in India is at a very nascent stage as compared to the global market, therefore holds a high potential for growth in the next few yearsSources: Nasscom,PWC,CII* addressable market for Indian software product businesses will be about USD 315 billion 10
  11. 11. Technology PrioritiesCloud computing ranked number 1 across CIOs both in India and US as the top technology priority for 2011Top 10 technology priorities Market Trends US 68% of IT majors plan to roll out Cloud Services in the 1. Cloud computing next one year in the following format 2. Virtualisation 3. Mobile Technologies 53% 4. IT Management 42% 5. Business Intelligence 34% 6. Networking, voice, and data communications 7. Enterprise applications 8. Collaboration technologies 9. Infrastructure 10. Web 2.0 India Paas Saas Iaas 1. Cloud computing Users want to adopt Cloud Services in the next one year in 2. Mobile technologies the following format 3. Virtualization 67% 4. Enterprise resource management (ERP) 5. Enterprise applications 50% 6. Business process management (BPM) 7. IT Management 33% 8. Network, voice and data communications 9. Business intelligence (BI) 10. AnalyticsSources: Source: Gartner, E&Y,PWC; Paas Saas IaasPlatform as a service(Paas), Software as a service(SaaS), Infrastructure as a service (IaaS) 11
  12. 12. Global Technology M&A FY2010Aggregate value of deals in the software sector more than doubled from approximately $23.8 billion in 2009 toabout $49.9 billion in 2010 Global technology transactions value flow by sector 2010 Market Overview and Trends Communicati Non-tech  Total value of technology M&A deals in FY2010 was ~$119 bn ons 3% equipment  Disclosed cross-border (CB) deal value rises to 41% of total deal 8% value, up from 25% in 2009  Trends involving security, storage, e-commerce and business Computer analytics, as well as trends in online and mobile games, Peripherals advertising and marketing, all drove M&A transactions especially 10% when they intersected with one or more of the mobile, social and Internet cloud trends 8% Software 42%  60 cloud computing software sector deals, including multiple transactions by Oracle, BMC Software Inc. and CA Inc. IT services  36 deals in Information security, including two of the top five: 20% Safran-L-1 Identity Solutions (with a non-technology company buyer) and Symantec-VeriSign’s identity and authentication business. Semiconduct ors  The “app store” approach expanded beyond smartphones to 9% embrace all manners of software in 2010. • Accessibility to app store distribution supports the emergence of a large number of small developers, which could lead to significant M&A in the futureSources: E&Y technology M&A 2010 update 12
  13. 13. US Software Product M&A Q1 2011394 software M&A transactions in 1Q11 totalling $8.3 billion were completed 431 transactions in 1Q10 totalling$4.6 billionM&A deals by product category during 1Q11 Number of SAAS deals as % of deals in software sector 9.90% 9.50% 9.4% 7.70% 7.0% 6.20% 5.40% 3.90% 4.5% 2.80% 3.8% 3.8% 3.8% 3.8% 2.60% 2.30% Healthcare Fin Services BI SC CRM Security Manufacturing 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11Observations  Security software providers and software companies focused on the  SaaS acquisitions accounted for 9.9% of all software financial services industry garnered the highest median TTM revenue acquisitions in 1Q11, up from only 2.8% in 1Q09 multiple (3.7x)  In 1Q11, 39 SaaS companies were acquired, compared  Healthcare applications led with 27 deals during 1Q11; Companies to 26 SaaS acquisitions in 4Q10 and 10 in 1Q10 vertically focused on Financial Services realised 20 transactions  SaaS businesses realized a 137% premium in their valuationSources: Software Equity Group 13
  14. 14. Software Product Domestic Market OutlookSMB spending in India on SaaS, a key component of cloud computing, is anticipated to rise by 43% in 2011Cloud computing market in India Mobile VAS market in India Internet penetration in India 19% 10006.2 USD millionUSD million 358 7% 650 1200.1 110 FY2010 FY2015 FY2010 FY2015 FY2010 FY2015 SaaS Iaas + Paas Products poised for adoption in SMB segment Products poised for growth in MVAS Online search and advertisement  Enterprise Resource Planning  Entertainment + Gaming  Online ad spend increased from  Business Intelligence  M-Commerce $175mn in FY2009 to $220mn during  Customer Relationship Management  Location based services FY2010  50% growth predicted in online ads during FY2011Sources: Nasscom, Economic times, 14
  15. 15. ConclusionCloud computing capabilities will be a major deal driver in the coming yearCompanies with an International Appeal Companies with a Domestic Appeal Applications delivered over Cloud: BI, ERP  Applications delivered over Cloud: BI, ERP,CRM Security software for the cloud  Search Engine Marketing  Mobile ApplicationsBusiness Intelligence(BI), Enterprise Resource Management(ERP),Customer Relationship Management(CRM) 15